Wednesday, March 6, 2013

The Shield Act and Troll Hunting.

The Saving High-Tech Innovators from Egregious Legal Disputes (SHIELD) Act proposes a loser pays framework for patent infringement lawsuits brought by patent assertion entities, aka patent trolls.  The PAE also needs to file a bond equal to the estimated cost of the legal fees when filing a lawsuit claiming infringement of one of their patents.

The new SHIELD ACT was reintroduced by Reps. Jason Chaffetz (R-UT) and Peter DeFazio (D-OR) in a rare show of bipartisan cooperation.  The bill received immediate support from the high tech blogosphere where the technical cognoscenti extolled the legislation's potentially huge impact on patent troll behavior.

(How much time is spent by Congressional staff sitting around coming up with acronyms?)

Congressman DeFazio, commenting on patent trolls stated, "They pad their pockets by buying patents on products they didn’t create and then suing the innovators who did the hard work and created the product."  Yeah, kill the evil patent troll.  Not so fast. There's a bit of intellectual property vertigo setting in here.

The trolls buy patents on products they didn't create and then sue the innovators.

The companies make products that cover inventions they didn't invent and are infringing and aren't paying royalties to the inventors who did the hard work and created the invention.

There doesn't seem to be any one wondering why these guys are infringing on some inventor's patent in the first place.  And the bill isn't addressing the real issue - why is it that the brightest guys and gals in the room can't find the patents they need to license when they create their products in the first place?

After all the cheering dies down and reality sets in the  Shield Act as currently crafted raises some nontrivial issues.

First its new protections kick in too late in the PAE enforcement campaign.  Most PAE campaigns are settled long before they get to court.  Business people targeted by a PAE campaign, the bulk mailing, indicia of extortion type, are faced with two choices: settle quickly at a low price, sign the non-disclosure, go home and take a shower and get back to business; or go to battle, spend a lot of money and management energy and hope you'll win someday.

For some business people the decision is pretty simple.  A legitimate infringement lawsuit fight can go on for three or four years while you wait for the USPTO to reexamine the patent, and wind through the rest of the legal process. Getting your money back isn't the same as not spending it in the first place. Business people have to ask them selves if they have the money and stomach for the fight? A lot do not.  Most don't have the guts of the folks from Newegg or the know-how to find the prior art to invalidate an overly broad or fuzzy patent.

Then there's the bond exclusion. The SHIELD Act excludes certain parties from the bond requirement when they file an infringement suit:

1) Original inventors, joint inventors, and the original assignee of the patent;
2) Entities that have made a substantial investment in exploitation of the patent through production or sale of a product covered by the patent; (this doesn't to protect operating entities that make products but doesn't state that seem the defendant has to own the patent they are "exploiting"); and
3) Technology transfer organizations whose primary purpose is to facilitate commercialization of technology developed by one or more institutions of higher education.

The original inventor/original assignee language is problematic.  The bill doesn't address what happens when one firm is acquired by another as part of the normal course of business. Would the patent portfolio owned by Chrysler become worthless when it transferred to Fiat as part of the purchase of the firm?  And what about all those A123 Systems battery patents that transferred to Wanxiang when they acquired the company in bankruptcy, are these patents no longer enforceable and free for anyone who now wants to make the same types of batteries to exploit? Will firms engaged in these types of transactions no longer be able to protect their intellectual property from infringement? The bill doesn't address asset sales when patents are sold separately as part of bankruptcy proceedings.  Does this preclude recovery of value from assets of a company in bankruptcy by rendering the patents unenforceable?

Is a patent less valid when it's not owned by the original inventor?  Does the transfer of the patent to a third party by the inventor or assignee, after all someone needs to actually transfer the patent before the PAE can sue anyone, mean the patent can't be enforced without having $1M to post a bond?

The technology transfer exemption may seem appropriate but universities file PAE-like enforcement lawsuits they just don't send out 10,000 letter first (at least not yet).  In December 2012, a nine member federal jury ordered Marvell Technology and its US operating subsidiary Marvell Semiconductor Inc. to pay $1.17 billion in damages to Carnegie Mellon University. Carnegie Mellon University sued Marvell (MRVL: NASDAQ) for infringement of two patents, 6,201,839 issued in 2001 and 6,438,180 granted in 2002.  Carnegie Mellon may be a technology transfer organization but they aren't making any products.

Acacia Research's stock took a 4% hit while analysts try to figure out the impact on its business model if the bill becomes law.  Most of the stock value prognosticators feel that by the time Acacia goes to court it usually has a very strong case and can easily afford the bond contemplated by the bill,  a buying opportunity for ACTG's stock.

Nice try.  It looks good for the Congressmen to stand up with their venture capital and entrepreneurial innovator constituents in a show of support against the evil troll but it doesn't do much for the vast majority of situations where the demand letter arrives and entrepreneurs need to decide if it's more cost effective to pay up and move on rather than to mount a fight and hope that you'll win and eventually get your legal fees back. The only thing that's going to fix the problem is better patents, better ways to get rid of the ridiculously overly broad fuzzy ones, and creation of information resources for new companies making new products to search for and find the patents they need to license when the license is cheap and the market is small.  It is better than waiting to build markets and create value for their shareholders and then wait for the letter to arrive and hope you get your money back.